Peru - Economic Briefing September 2002

Economy Grows at Robust Pace (continued)

Second quarter deficit below expectations
In the second quarter, the public sector deficit reached 1.8% of GDP. The reading was considerably below than the 2.4% deficit expected by the Consensus but above the 1.4% deficit registered in the first quarter. However, expenditures are typically skewed towards the end of the year, when the public sector deficit spikes. The increase of the public sector deficit over the first quarter was mainly the result of the increase in non-financial expenditure of the central government (0.2 percentage points), the worsening of the state-owned enterprise balance (0.2 percentage points) and rest of the central government (0.2 percentage points), which was partially offset by the improvement in central government revenues (0.3 percentage points of GDP).

Cabinet approves budget – spending increase concentrated in debt service
In late August, the cabinet approved the 2003 central government budget. According to official government sources, the overall budget will be approximately 40 billion soles (US$ 11.3 billion) compared with about 35.8 billion soles for 2002. Much of the increase is due to a change in accounting rules, which will include tax exemptions as spending. According to Finance Minister Javier Silva Ruete, the budget is virtually unchanged in nominal terms from this year, with a slight 0.6% increase in spending, which reflects US$ 500 million of additional debt servicing charges. The government plans to sharply increase tax revenues by reducing tax exemptions and replacing them with investments in infrastructure projects. Furthermore, the government intends to maintain the 2.0% IES payroll tax until revenues improve. The tax was originally scheduled to expire at the end of this year but has been extended into next year. The fiscal deficit target for 2003 has been set at 1.9% of GDP. Consensus Forecast panellists are less optimistic about the government’s ability to keep public sector spending in check and expect the Toledo administration to overshoot the target in 2003.

Prices rise in August – country leaves deflationary territory
In August, consumer prices increased 0.10%. The increase was mainly driven by higher prices in the category housing rents, fuels and electricity, which were compensated for by lower food and beverages prices. As a result of the August increase, annual headline inflation rate rose from a negative 0.14% in July to a 0.26% increase. The Consensus expects that the higher price trend will persist.

Current account improves in second quarter
In the second quarter, the current account deficit reached US$ 267 million, or 1.8% of GDP. The figure represents an improvement from the US$ 374 million deficit in the first quarter and also from the US$ 288 million deficit (2.0% of GDP) in the same quarter last year. The improvement was due to a higher trade surplus (Q2 2002: US$ 121 million vs. US$ 20 million deficit in Q2 2001), which in turn resulted from a 13.8% increase in exports and a more moderate 5.7% imports growth. As a result, of the widening of the surplus, the annual current account deficit narrowed to US$ 980 million. Consensus Forecast panellists expect this deficit to rise by the end of the year, as the continued economic recovery should raise demand for imports.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.